NEW DELHI: There are more people using a mobile phone than a bank account in India. And setting up bank branches is not only expensive but time consuming. According to some studies it could easily take more than two decades for bank branches to reach the entire 1.2 billion population.

The way out is clearly mobile banking - using handsets to enable some of the banking functions like payments, money transfer and so on. ET lists why we need mobile banking, status of mobile banking, problems and the future:

Why:

1) For Financial inclusion. Almost 60% of the population does not have a bank account.

2) Take banking to the masses - there are only 90,000 bank branches in India and covering the whole population with physical bank branches will take more than 20 years.

3) Mobile banking costs make for a compelling business case - according to Citibank the bank branch is 10 times more expensive than doing a transaction on a mobile phone.

4) Large part of the population has a mobile phone, but no bank account - making the case of using mobile phones for financial services (like payments) compelling.

Status of Mobile Banking

1) According to HDFC Bank, two years back 40-45% of the banking transactions were happening in the bank branch. This has dropped to 18% now. So, 82% of the banking needs of a HDFC bank customer who has registered for mobile banking are done outside the bank branch. HDFC has 1.2 million mobile banking users. State Bank of India has 5.2 million registered mobile banking users and this is increasing by 2 lakh new mobile banking users per month. Almost 63% of Citibank account holders use the digital medium for banking.

3) The Reserve Bank of India has allowed use of 'semi closed wallet' by mobile companies. Via semi closed wallet accounts, people can send and spend money through the mobile network, but can't withdraw cash. Airtel, Vodafone and Idea are offering such services.

4) To expand mobile banking reach, HDFC Bank has started Hindi mobile banking service and a 'net safe light' virtual card - both were started last month. The latter helps a user to store a limited value on his mobile. Say a credit card limit is Rs 2 lakh but a user want to buy books online worth Rs 2,000. He can create a new limit on his card using net safe light and use the code generated for online shopping. This creates a security layer for the user - he uses the card for online payments without worrying about it being misused as the limit is only Rs 2,000.

Â Limitations and problems of Mobile Banking

1) Despite a high base of mobile phone users, the smart phone penetration is limited, less than 20%. This restricts use of full scale mobile banking; users can't download banking app on basic phones. They have to depend on SMS, which is cumbersome.

2) A user can have up to nine mobile phone numbers (allowed by TRAI) but only one mobile bank account (says RBI). And the limit of transactions for mobile payments is Rs 50,000 per month.

3) The mobile payments model via telcos makes money on scale. According to Airtel it will take two years to be relevant and five years to make money. Mobile payments today are at the same stage as credit cards 20 years back and ATMs 15 years back.

4) Despite being convenient, the cost of Know Your Customer (KYC) for mobile banking or mobile payments is huge - Rs 400 to Rs 500 per person. This is more than the average revenue per subscriber (ARPU) for telcos.

5) Less than 10,000 outlets today accept Airtel Money or any other mobile payment. There's no incentive for merchants to accept mobile payments as they don't get any commission.

Future of Mobile Banking

1) Mobile banking is the future because of its cost effectiveness and ability to reach out to customers in remote areas. It will take 5-6 years for the model to mature.

2) In US, Europe, phones with NFC (near field communication) have entered the market. NFC is a chip embedded in a phone enabling the phone to interact with a point of sales terminal (with this, phone can act as a virtual credit card).

3) Cheque truncation can be done via mobile phones. In US it is called 'Cheque 21' or 21 stcentury cheque payment. Not yet available in India.

4) Banks will be able to approve and give loans via mobile banking within the next five years. This will further reduce the need to go to a branch.